The last thing the airline industry wants is a bumpy ride. But that's exactly what's happened in the last decade, as the airline insurance market has experienced major turbulence. In the immediate aftermath of 9/11, for example, the prices of both hull and liability insurance climbed to unprecedented heights. Then they began to freefall. And in 2006 and 2007, the market plummeted.

Although premium prices rose again in 2008, underwriters are still feeling pressure as a result of estimated losses from the last several years, as well as the global economic situation that forces capital providers to examine every investment.

"In January 2007, insurers were covering 30 percent more airline risk for half of the premium that they had been in 2002," says Simon Knechtli, Aon Global's UK Aviation & Aerospace practice leader. "There is little surprise that this trend came to an end and that the market has hardened over the last nine months. Yet the fortunes of the airline industry have dramatically worsened."

Takeoff and Landing: Change in approach to Airline Insurance

Aon's Knechtli points out that many aspects of the airline industry have changed over the past 18 months. "At the beginning of 2008, we were discussing how quickly the manufacturers could increase capacity in the face of massive demand for aircraft from around the world, as well as the need for qualified, experienced staff to meet the exponential growth of air travel," he says. "Now the industry is faced with fragile financial markets that are extremely cautious about their investments."

What's more, the global economic problem has decreased demand for air travel—particularly for business.

"As insurance brokers, we provide a bridge between the market and our clients, two parties that have contrary goals, particularly in the current climate," Knechtli says. "For many airlines, insurance is actually a small part of their cost base compared with fuel, which rose significantly in 2008. Previously, the cost of insurance has also often proved more flexible than other mandatory services and commodities, such as airport fees."

But this is no longer the case, Aon's Knechtli says. "Everything is now being negotiated. Airports are recognizing the need to be flexible with their pricing to ensure that airlines are able to attract the number of passengers needed for profitability. Meanwhile, underwriters are far less flexible on the cost of airline insurance than they were two years ago."

While an airline may only be able to mitigate some cost of the hardening insurance market, airlines could reduce rising costs by managing their total cost of risk strategically. To do this, organizations need to understand the entire risk picture and maximize the value of risk insurance premiums.

That's where Aon, in the role of airline insurance broker, comes in. "Ultimately, the role of the broker is to help its clients understand how the insurance market is evolving and what is likely to happen when it comes to placing of their renewal," says Knechtli. "We are here to take on the market on our clients' behalf as well as point out additional ways they can save money through efficient risk strategies."

airline industry – risk Above the clouds?

Despite the challenges, only a few larger airlines have actually ceased operations over the past two years. There are a number of reasons, but perhaps the high cost of fuel in early 2008 forced airline companies to look at their business models and make difficult decisions early in the economic downturn.

The falling price of oil reduced operating costs in the final quarter of 2008 and first quarter of 2009, which may have helped a number of airlines worldwide, although some airlines are said to have suffered as a result of mistimed hedging strategies and other judgments.

"The last decade as a whole has been turbulent for the industry, but this has made it very good at responding quickly and effectively to changing conditions," says John Levack, Aon's head of aviation for Europe, Middle East and Africa. "The airline industry made an exceptional profit in 2007, but in 2008 it reported losses—and 2009 is predicted to go beyond worst-case forecasts. Despite this, it has been very impressive in its ability to adapt to everything that has been thrown at it."